Nine ways coming into effect of new taxes will hurt you

A customer at Khetia Supermaket in Nyeri. The price of cooking oil is expected to go up with new finance law. June 6, 2023. [Kibata Kihu, Standard] The higher fuel prices that took effect at midnight are just the beginning of the rough times that Kenyans will have to grapple with, as the Finance Act 2023 comes into effect. The Energy and Petroleum Regulatory Authority (Epra) yesterday increased pump prices to factor in the 16 per cent Value Added Tax, which was hiked by the Finance Act from 8 per cent. This saw the cost of super petrol go up Sh13.49 a litre to Sh195.53 in Nairobi. Diesel went up to Sh179.67 per litre - an increase of Sh12.39 - while kerosene will now retail at Sh173.44, going up by Sh11.96 per litre. A litre of petrol will retail for as high as Sh207 in far flung towns of Elwak and Sh209 in Mandera. "Epra has recalculated the maximum pump prices that will be in force between July 1, 2023 and July 14, 2023 taking into account VAT at 16 per cent," said Epra in a statement yesterday. "As a result, the changes in the maximum allowed petroleum pump prices in Naiorbi are as follows: super petrol, diesel and kerosene increase by Sh13.49per litre, Sh12.39 per litre and Sh11.96 per litre respectively." The prices will be in place until July 14 when Epra will issue another price capping guide. The regulator is required to publish maximum prices for the three products on the 14th of every month but can issue addendum midway should there be major regulatory changes such as changes in tax laws. Epra increased the cost of fuel even as there was uncertainty as the High Court halted the implementation of the Finance Act. The new Act was suspended by the High Court after Busia Senator Okiya Omtatah filed a case challenging the constitutionality of the new law. Other than pushing up transportation costs, the higher fuel prices are expected to have an impact on other economic sectors including agriculture, manufacturing and power production. In addition hike in the cost of fuel, salaried Kenyans are also bracing for reduction in the amount of money they will be taking home at the end of July as the housing levy takes effect. Analysts said the tax on fuel and the housing levy are among the taxes that could inflict most pain in the coming days and weeks but warn that many of the clauses in the new law would likely dampen the economic outlook. "The VAT on fuel and housing levy - these two have been the most controversial - will achieve two things; they will drive up the cost of living and slow down production," said Ken Gichinga, Chief economist at Mentoria Economics. "This might affect the economic outlook for the second half of this year. The second half is typically more vibrant but I think this vibrancy might be dampened in these increases in the cost of production." The controversial affordable housing levy will also come into effect today. The levy will result in thinner pay for employees in formal employment starting July as they part with 1.5 per cent of their basic pay. This will be matched by their employers. Employers warned that this could lead to stagnation in job creation and even possible layoffs in an attempt by companies to contain high labour costs. "The reality is that we see a danger in reduction in jobs, we see a danger in lowering employee morale because they are already distressed. We are calling on the government to listen to the private sector so that they can hear why we are saying no to some of the changes... the timing is wrong," said Jacqueline Mugo, executive director of the Federation of Kenya Employers at a past event when employers rejected the housing levy. The local economy, the employers say, is emerging from multiple shocks that saw the private sector slow down on the number of jobs it created. These include the Covid-19 pandemic whose aftershocks are still evident, the three year drought and global challenges including the Russia-Ukraine war and the US tightening of its monetary policy that resulted in the weakening of the shilling as well as shortage of US dollars locally. "These put on hold any progress that we could have seen in business to open up jobs, so we have not been able to create jobs to the extent that we may have wanted," said Mugo in a recent interview. It is the second time that the government is taking a stab at the housing levy. The Jubilee Administration had in 2018 proposed a similar levy that would help achieve the regime's plan to build 500,000 affordable housing units under the Big Four Agenda by 2022. It was hugely unpopular and at some point saw more than 10 suits filed in court by lobbies and employee unions in a bid to stop the government from imposing the levy on both workers and their employers, with the government losing at the time. This year, the National Treasury had initially proposed that employees make a contribution of three per cent on their gross pay that would also be matched by the employer. This was capped at Sh5,000 per month, translating to a contribution of Sh2,500 by the employee and a similar amount by employer. Following the public consultation phase, it was changed into a levy as opposed to a contribution. The rates were halved for both the employer and employee to 1.5 per cent. The cap was however removed, which means higher contributions for high earning Kenyans. The contributions will however not be refundable unlike in the initial scenario where contributors would have been refunded in case the contributor did not qualify to get a house. In addition to the fuel costs that will increase their cost of business, manufacturers have warned some of the clauses in the new law could force some of them out of business. The 17.5 per cent export and investment promotion levy on imports is expected to hit many industries, including cement and steel. Paper industries will pay the new levy at a rate of 10 per cent, resulting in higher production costs for packaging materials, which is expected to increase the cost of manufactured goods. The Kenya Association of Manufacturers (KAM) said this would further weaken the local industries, whose contribution to the Gross Domestic Product (GDP) has been shrinking. The manufacturers warned that it could also result in an influx in imports from neighbouring countries. "The products that will be subjected to this levy (Export and Investment Promotion Levy) are critical to manufacturing processes," said Anthony Mwangi chief executive KAM. The government has argued that this will support local manufacturing. KAM however said it would raise the cost of raw materials that local industries use and in turn make locally manufactured products expensive. "If you look at cement manufacturing, for instance, one of the things earmarked for the levy is clinker, which accounts for 70 per cent of what goes into making cement. This will mean that our cement will be more expensive than cement from other EAC countries," said Mwangi, adding that higher taxes on clinker would result in an increase in cement manufactured in Uganda and Tanzania finding its way into the Kenyan market. "If Kenya indeed wants to be a producing nation, we must come up with policies that encourage production... if we are not careful, we are going to be a big supermarket for our regional countries who are doing a lot of manufacturing." KAM also noted reduction in disposable income has seen more Kenyans adopt buying of products in smaller quantities. Thus while the so called 'kadogo economy' became popular with low income households, this has creeped up and households that would pass as middle income have also taken this up. The manufacturers lobby noted that the households are going for smaller quantities that serve daily needs as opposed to previously when they would buy packaged items that would go for a week or a month. This has resulted in a rise in dispensers for items such as edible oils, milk and powdered soaps. "Some manufacturers are moving towards reducing pack sizes to meet the needs of customers," said Mwangi. "Whereas others are reducing the workforce significantly and other overheads as a cost cutting initiative, some manufacturers are reducing cost-base by delaying non-urgent expenses and renegotiating banking facilities to mitigate financial challenges including dollar deficit." Also coming into effect today will be the higher Turnover Tax of three per cent for small businesses, going up from the previous rate of one per cent. This will apply to small businesses, which Kenya Kwanza had referred to as hustlers as they endeared themselves to many of the people who own or are employed by these micro and small businesses.

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